Venture capital (VC)-backed companies in the UK raised approximately US$1.3 billion across 113 deals in Q4 2015, capping off a record-breaking year which saw a grand total of $4.75bn raised via more than 400 deals - according to Venture Pulse, the quarterly global report on VC trends published jointly by KPMG Enterprise and CB Insights.

The figures mean the UK accounted for approximately 43 percent of all venture capital activity in Europe during the quarter, with key transactions including the $460m Series H funding round by O3B Networks; the $100m Series D investment in food-delivery company Deliveroo; and the $83m funding round raised by international business finance specialist, Ebury Partners.

The bounce-back in UK deals after a slightly more anaemic Q3 ran in sharp contrast to the global VC market, which saw a sudden cooling in activity: Q4 2015 saw US$27.2 billion invested across 1,742 deals globally marking a 30 percent drop off in funding, and the lowest quarterly deal activity since Q1 2013.

Nevertheless, 2015 was still a landmark year with global VC funding hitting an all-time high of $128.5bn, up 44 percent on 2014’s total of $89.4bn.

Ben McDonald, head of KPMG Enterprise in the UK, said: “2015 was a record-setting year for VC investment in the UK, with the maturity of our start-up ecosystem, coupled with our celebrated culture of entrepreneurship, proving to be a strong draw for investors from across the globe. Experienced management teams, highly skilled employees and disruptive business models will always attract attention, and I have no doubts that we will continue to see significant levels of investment activity throughout 2016.2

But Ben McDonald added: “Nevertheless, the slowdown in VC funding activity seen globally does provide us with something of a slight reality check. With a number of IPOs falling short of recent private valuations in the US, other US investors re-evaluating and writing down some of their VC investment portfolios and substantial uncertainties making Asian equity markets stumble, VC investor confidence has clearly been rattled. We will need to keep a close eye on these developments over the coming months, as the UK VC ecosystem is clearly not fully immune to them.”

Tech continued to dominate both the UK and European investment landscape, accounting for two thirds of all deals to European VC-backed companies in Q4.

Patrick Imbach, head of KPMG’s High Tech Growth Team, explains why tech continues to capture the imagination of investors. He said: “Investment in the UK’s burgeoning technology sector has increased over the course of 2015 to record levels. Not only is this is an indication of the sheer quality of investment opportunities in the UK, but also symptomatic of the fact that valuations here are still perceived to be moderate when compared to the valuations of their sector counterparts in the US and Asia.”

He continued: “These relatively moderate valuations in combination with a low interest rates environment will continue to provide a solid foundation for both UK and foreign VC investment into our home-grown technology start-ups. Furthermore, we also expect that larger UK businesses will continue to invest substantially in emerging technologies to help evolve their existing businesses in an ever-changing business environment.”

Other key findings of the research include:

Asia, in particular, showed a significant slowdown on a funding basis, falling 32 percent to $9.7 billion on 346 deals versus Q3 2015. North America also slowed as funding fell 32 percent to $14.1 billion on just 1,026 deals versus Q3 2015. Europe did not see the same slowdown, as funding fell just 11 percent from Q3 to Q4, with VC-backed start-ups raising $3 billion on 338 deals.

The median size of late-stage deals in the quarter globally was $31.3 million - a substantial increase from the $18.3 million median observed in Q4 2014.

The number of new Unicorn companies fell to 12, the lowest level of new Unicorn births since Q2 2014. The previous three quarters in 2015 combined saw 60 new Unicorns.

Mega-rounds ($100 million+ financings) dwindled with just 38 deals made in Q4, versus 72 in Q3 2015. A slew of mutual fund write-downs as well as investor concerns over an overheated late-stage market drove the slowdown in both North America and Asia.

Anand Sanwal, CEO of CB Insights, concluded: “Globally, sentiment and the outlook became very negative towards the latter part of Q3 which suggested we would see a slowdown. But we were surprised to see the pull-back manifest itself so quickly – just one quarter later. This slowdown was not just for VC-backed companies at the late stages; while the Unicorns get a lot of attention, Q4’s data shows that it became harder for early-stage companies to raise money as well.”

He added: “Nevertheless, Europe was one of the bright spots this past quarter. Overall, it has not participated in the mega-financing and Unicorn boom to-date like other venture hubs. Longer-term, the glass half-full view of Europe is that it may be insulated in a slowdown because it’s not been as ‘reckless’ as its Asian and North American peers. Conversely, given venture capital’s power law (1 or 2 winners are larger than all the rest), the glass half-empty view is that Europe has been too cautious in this latest boom, and will miss out on tomorrow’s big winners. This debate will likely intensify over the coming quarters.”

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